Business Alliances in the Shipping Industry

Logistics alliances are becoming commonplace business arrangements, and now they are spreading, as a way of lowering distribution and storage operating costs. For many manufacturers and vendors, these ventures offer opportunities to dramatically improve the quality of customer service.

There are different types of alliances, such as arrangements between two service providers, and those between two product marketers. The outsourcing of transportation or warehousing requirements to a specialist is, of course, a common everyday standard. What is unusual about the relationships described here is the parties combine their operations to obtain mutual benefits.

A typical format for an alliance is a vertical alignment between two or more product marketers, usually marked by transfer of inventory ownership.

A simple example is a distribution link between Procter & Gamble and Wal-Mart. A more complicated version is a projected consortium of four companies in the women’s ready-to-wear apparel business – Dupont, which makes the fiber, Milliken converts the fiber into fabric, Leslie Fay, which produces women’s garments, and Dillard Department stores sell them. The arrangement makes the use of resources more efficient in the face of volatile fashion demand. The arrangement is geared to speed inventory replenishment, and reduce the time elapsing fiber to retail rack.

To permit wholesalers to offer daily delivery to retails customers at specified times, the Atlanta-based carrier has established an array of services and pricing. The rates were based on guaranteed delivery, at a fixed charge, to the retailer of whatever product quantity is required. The charge was based on the average shipment weight at a rate negotiated in advance of each 30-day planning period. It remains the same throughout the period, regardless of the quantity of freight shipped. The result was a dependable daily service at a fixed cost that the wholesalers and retailers know in advance.

Another feature of these arrangements is separating buyers and sellers.

Many of these relationships endure for five or more years, and many operate with informal understandings, rather than formal contracts. Informal partnerships are common in the transport sector. For Instance, Centra, Inc.’s transport division was providing time-phased delivery of components and parts to General Motor’s BOC plants in Lansing, Michigan. There was no specialized equipment needed, and the arrangement was subject to annual review. At the other end of the spectrum was the long-term contract between NYK Line and Pioneer Electronic, where NYK was handling all logistics aspects, from importing to customer distribution for mixed shipments of products, from a network of over one million square feet of warehouse space in the Los Angeles area.

In these alliances, the service provider usually assumes a certain amount of risk through an agreement calling for a penalty, such as an automatic reduction in revenues, when performance is poorer than expected. On the other hand, these agreements often include rewards for superior performance, such as a greater-than-expected percentage of on-time deliveries.

Today, there are a variety of relationship types in the logistics industry.

Many of these are casual in nature, and are unlikely to change the competitive position of the company involved. Recently, cooperative arrangements of a different nature have begun to appear in greater numbers. These are strategic alliances, aimed at securing, maintaining, or improving the competitive advantages of a company. In contrast to other types of relationships, they play an important role in strategic management, and the future direction of a company’s business. If a company is operating globally, within a large industry comprised of many competitors, it has to work with partners.

Globally-competing companies must be in all important markets simultaneously if they are going to keep competitors from establishing competing positions. Companies need partners and alliances to manage these operations.